Demystifying technical analysis
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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
When I began using technical analysis back in the mid-1980s, I was met with a lot of derision by some fundamental analysts. They viewed it, as Burton Malkiel referred to it in his book A Random Walk Down Wall Street, as "sharing a pedestal with alchemy".
What many of them didn't realise at the time was that this form of analysis has been around far longer than most people think. In various forms it dates back hundreds of years.
The Dutch used it in the 17th century, the Japanese have used candlestick charts since the 18th century, and in the US, the writings of Charles Dow in the 19th century, and RN Elliott and WD Gann in the 20th century, are legendary.
If you think about it, these days technical and fundamental analysts both talk about such things as support and resistance, and cyclical and seasonal factors. So they are now merging. The fundamental analyst rarely spoke of those concepts back in the 1980s.
I remember the 1987 crash. I had just come out of hospital after an operation and was going to take time off to recuperate. I can't tell you how many phone calls I received from my work colleagues, most of whom had shown little regard for technical analysis.
"What now?" they would ask. "Could you possibly come into the office and update your charts?" Back then, my charts were updated daily by hand. So off I went.
Again in 2002, I received a phone call from a fellow that I used to work with. He was very well-respected and ran the investment division of a large global funds management company. "Lesley, no one knows when this will end ... what do your charts say?"
For a small minority, the technical analyst will still be seen as some form of "crystal ball" gazer, one who reads the stars, and one who cannot be taken seriously. But this view has been slowly dismissed and technical analysis is now widely incorporated into the investment process.
Just as there are many facets of fundamental analysis there are many different components of technical analysis. I incorporate an array of different factors when assessing the condition of various markets each week and my interpretation of technical analysis is quite broad.
I prefer to call it market analysis -- this includes technical analysis, comparative analysis, intermarket analysis and psychology.
This is covered in some detail in the Technical Analysis Education Centre, which can be found on the Technical Analysis tab, so I need not go into too much detail again.
What I do want to focus on over the next few weeks is the psychology side of things and how we can try to avoid letting our emotions get in the way of sound decisions.
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